Shortly before Congress adopted a measure to help curtail individual surety fraud, an appellate court decision seemed to make it more difficult for contractors who use individual surety bonds on public project bids to compete.
In the early October decision in Anthem Builders v. the U.S. Dept. of Veterans Affairs, brought before the U.S. Court of Federal Claims, a judge upheld the decision of a VA contracting officer who found an individual surety “nonresponsible” and rejected the bid of the contractor that submitted the bond.
The bid was for work at the Golden Gate National Cemetery in San Francisco. Anthem argued in its appellate complaint that it had submitted a lower bid and was initially selected for the award, and that the exclusion of Anthem based on the bid guarantee was “arbitrary, capricious, and unsupported.”
The bond Anthem submitted was supported by an irrevocable trust receipt (ITR) issued by First Mountain Bancorp for the penal sum of the bond and an ITR supported by $30 million in certificates of deposit, issued by HSBC Bank and held in escrow by a business called First Mountain Bancorp.
Anthem's complaint claimed that the contracting officer's reason for rejecting the bond was that the assets for the bid bond were inadequately identified. When asked whether VA contracting officers would be rejecting bids containing individual surety bonds as a matter of policy, a spokesperson wrote, “At this time, there has been no decision to make any policy changes.”
Defense of Individual Surety
The VA did not respond to other questions about the case, but the person who backed the bond, George Gowen, defended the use of individual surety.
“This impacts the building industry. Without individual sureties, things don't get built,” said Gowen, who is director of First Mountain Bancorp. “There's not enough corporate surety capability to fund all these jobs. And without individual sureties stepping up to the plate, a lot of jobs would not get done.”
Gowen added that he had already done what was needed to make the disputed bonds responsible. “We made some wording changes to our documents, that's all that was done.”
In 2007, Gowen was a plaintiff in a lawsuit with former individual surety Edmund C. Scarborough against the U.S. Army and the National Association of Surety Bond Producers, which had issued warnings about possible surety fraud. The lawsuit was eventually settled and its terms never disclosed.
Congress recently adopted a new defense spending authorization bill that contained a little-noticed amendment that should eliminate much of the fraud that has characterized individual surety bonds and expand the Small Business Administration’s flexibility in backing bonds for small contractors. The surety measure tightens up the rules for using individual sureties on federal projects by requiring the assets backing the bonds to be real and deposited into an account that is in the care of the federal government.
